Chapter 2
Explain the meaning of cost and how costs are assigned to products and services.
Cost is the amount of cash or cash equivalent sacrificed for goods and/or services that are expected to bring a current or future benefit to the organisation. Costs are incurred to produce future benefits. As costs are used up in production of revenues, they are said to expire. Expired costs are called expenses Accumulating costs is the way that costs are measured and recorded. Assigning costs is the way that a cost is linked to some cost object. A cost object is something for whig a company wants to measure the cost. Cost Object- any item such as product, service, customer, department, project, geographic region, plant, and so on, for which costs are measured and assigned. Opportunity cost- a benefit given up or sacrificed when one alternative is chosen over another. How costs are assigned to cost objects: -Direct costs (materials and labour), easily and accurately traced to a cost object. - Indirect costs (materials, labour, and manufacturing overhead), cannot be easily, accurately or economically traced to a cost object. - Prime costs - Conversion costs - Product costs - Period costs -Variable costs - Fixed costs - Mixed costs - Selling costs - Administrative costs Allocation means that an indirect cost assigned to a cost object by using a reasonable and convenient method.
Prepare income statements for manufacturing and service organisations.
Financial statements for Manufacturing Operations: The operations of business can be classified as one of the following: - Service -Merchandising -Manufacturing The cost of a finished product includes the following: - Direct materials cost - Direct labour cost - Factory overhead cost
Define the various costs of manufacturing products and providing services as well as the costs of selling and administration
Products are goods produced by converting raw materials through the use of labour and other manufacturing resources. Services are tasks or activities performed for a customer, or an activity performed by a customer using an organisation's products or facilities to receive the service. Organisations that produce products are called manufacturing organisations, while organisations that provide services are called service organisations. The difference between products and services: -Services are intangible while products are not -Services are perishable, they cannot be stored for future, while inventory valuation is important for products is not an issue for services -Providers of services and buyers of services must usually be in direct contact for exchange to take play. * The main difference in costing is that products have inventories and services do not. Product Costs are those costs, both direct and indirect, of producing a product in a manufacturing firm or of acquiring a product in a merchandising firm and preparing it for sale. This consists of: -Direct Materials -Direct Labour -Manufacturing Overhead: All products costs other than direct materials and direct labour, are put into a category called manufacturing overhead. -Total Product Cost: The total product cost equal the sum of direct materials, direct labour and manufacturing overhead. Prime and Conversion Costs- Product costs of direct materials, Period Costs- are all costs that are not product costs. The costs of office supplies, research and development activities, the CEO's salary and advertising are examples of period costs. Period costs are divided into selling costs and administrative costs. Selling Costs- these costs are necessary to market, distribute, and service a product or service are selling costs. They are often referred to as order-getting and order-fulfilling costs. Administrative Costs- All costs associated with research, development, and general administration of the organisation that cannot reasonably be assigned to either selling or production are administrative costs.
